East Sussex Pension Fund: Responsible Investment William Marshall - - PowerPoint PPT Presentation

East Sussex Pension Fund: Responsible Investment

• William Marshall
• Paul Potter
• August 2016

Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority

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Agenda

• Background
• Fund’s approach
• Key themes
• Potential next steps

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What is responsible investment?

Responsible investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance factors, and of the long-term health and stability of the market as a whole. It recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning and well governed social, environmental and economic systems. UNPRI, What is responsible investment?

“Responsible investment isn’t about changing the world; it’s about understanding how the world is changing and how companies will be affected” Jane Ambachtsheer, Mercer

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Ethical investment is different

• Ethical Investment is an approach to

investment that seeks to directly impose the beliefs of the investor on assets held through the imposition of exclusions or limitations.

• The difference between Responsible

Investment and Ethical Investment is the difference between “Value” and “Values”

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Material environmental, social and governance factors

ENVIRONMENTAL SOCIAL GOVERNANCE Climate Change Stakeholder relations Board Structure Resource scarcity Supply Chains Accounting & Audit Water Availability Working Conditions Executive remuneration Greenhouse Gas emissions Diversity issues Bribery & Corruption Pollution Health & Safety Shareholder rights Energy efficiency Population Growth Transparency

Differentiate between systemic and operational risks

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ESG - Timeframe matters

Systemic risks: Potential long term impact, but can be influenced by shorter term changes Operational risks: Potential shorter-term impact

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RI in equities

Sustainable Investment

• Understanding the level of ESG

analysis carried out by managers, and the integration of this analysis into the research/portfolio construction process

• More relevant for certain investing

styles than others – the more concentrated and long-term/lower turnover the approach, the more relevant ESG analysis becomes (doesn’t apply to passive)

Governance & Stewardship

• Investors, as owners of the underlying

businesses, have a responsibility to act as effective stewards of these companies; clients, as ultimate

• wners, should accordingly monitor

managers’ behaviour

• Applicable to all equity managers,

although managers with bigger shareholdings and influence (such as passive managers) arguably have a greater responsibility

Can be divided into two main strands:

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RI in fixed income

• Ethical investing – mainly driven by negative screens (alcohol, armaments

etc.)

• Bond investors no voting rights so arguably less impact on governance and

stewardship than equity investors however engagement does occur

• Role is protecting client’s interests as creditors – covenant change, input to

re-structuring

• Bond managers responsible investment policies generally have evolved

from their equity model

• Sustainable investing – driven by positive screens focussing on

products/services with positive social benefit e.g. social housing

• Key is knowing the level of E, S and G taken into account in the decision

making process – how much weight is applied to these factors?

• Some managers assign an ‘ESG score’ as input to credit analysis, others

adopt a more informational approach

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RI in real estate

• Property has a visible impact on the environment, consuming resources in

both its construction and ongoing use

• Legislation from 1 April 2018 impacting the ability to let property with an

EPC rating of F or G

• Responsible Property Investment can reduce the costs of occupation,

thereby making buildings more attractive to potential tenants – Resource usage – Energy procurement – Waste reduction

• Sustainability characteristics of a building/portfolio can be measured

– Global Real Estate Sustainability Benchmark (GRESB) – Building Research Establishment Environmental Assessment Method (BREEAM)

Responsible Property Investment document

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Myners Principle 5: Responsible ownership

“Trustees should adopt, or ensure their investment managers adopt, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders and agents. A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles. Trustees should report periodically to members on the discharge of such responsibilities.”

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Institutions for occupational retirement provision

• Environmental, social and governance factors as referred to in the

UN Principles for Responsible Investment are important for the investment policy and risk management systems of IORPs. Member States should require IORPs to explicitly disclose where these factors are considered in investment decisions and how they are part of their risk management system.

• IORPs should, as part of their risk management system, produce a

risk assessment for their activities relating to pensions. That risk assessment should also be made available to the competent authorities and should, where relevant, include, inter alia, risks related to climate change, use of resources, the environment, social risks, and risks related to the depreciation of assets due to regulatory change ('stranded assets').

Wording from 2016 IORPII

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Law Commission Report & Fiduciary Duty

• “The most important distinction is between the factors relevant to

increasing returns or reducing risk (financial factors) and those which are not (non-financial factors)”

Non-financial factors Financial factors

Test 1 - Trustees should have good reason to think that scheme members would share their concerns Test 2 - The decision should not involve a risk of significant financial detriment to the Fund

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Fund’s focus to date

• Regularly considered by Pensions Committee

– Last discussed at Q1 2016 Committee meeting; and – Annual strategy day

• Agreed policy in place (SoIP) and Myners
• Collective engagement: Fund a member of Local

Authority Pension Fund Forum

• Fund’s managers have signed up to UNPRI and

UK Stewardship Code

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Fund focus going forward

• Focus of today
• Focus on Fund’s key objectives
• Agree procedures and policies for future success

Implementation Strategy Regulations and Beliefs Fund’s

• bjectives

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Topical item: stranded assets

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How climate change could affect pension schemes

Climate Change Inflation

Resource constraint

Economic growth Mortality/ Morbidity Asset returns Liabilities

Physical impacts (e.g. reduction in crop yields) and adaptation/ mitigation action impacts on Carbon risk, physical impacts and litigation risk have a potential financial impact Policy action (e.g. carbon budgets) and physical feedbacks (e.g. water scarcity) give rise to Supply/demand imbalances creates Could impact positively (technological change)

• r negatively (scarcity)

Physical feedbacks may result in changes to Impact on human livelihoods May result in lower spending

• n healthcare and impact on

human livelihoods

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In simple terms

Natural Environment Real Economy Financial Economy

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COP21

• 21st Conference of the Parties to the United Nations Framework Convention on Climate
• Change. Aimed to set a new international agreement on climate change to reduce carbon

dioxide emissions (“CO2”) and keep global warming below 2°C

• The agreement (not legally binding):

– Target a temperature rise of below 2°C up to 2100 – Emissions should peak as soon as possible – All countries will aim to achieve carbon neutrality in the second half of this century – Framework to measure, monitor & verify carbon reduction to improve transparency – Countries will submit updated reduction plans every 5 years – $100bn per year from developed countries will be donated to support adaption and migration in least developed countries and small island developing states

• Possible implications for investors:

– Increased regulation - identification of vulnerable industries is important – Introduction of new government policies - e.g. new law in France for most asset owners to disclose their carbon footprint – Increased focus from media & potential for continued lobbying for divestment of fossil fuels

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ESG - Current issue: Carbon risk

If we stay within the carbon budget, some fossil fuel reserves will have to stay in the ground and have no value: “Stranded assets” UK target to cut carbon emissions by at least 80% of 1990 levels by 2050. COP21 (Paris, December 2015): Limit temperature rise to 2% up to 2100.

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• Remove exposure to potentially compromised investments
• Strong lobby from organisations such as 350.org
• Focus only on equities?
• Ex-fossil fuels indices offers an option for passive investors
• Can bias portfolios positively
• Asset ownership conveys responsibilities on investors
• Engagement can influence corporate behaviour
• Will we see more active investors in future?

What can the Fund do?

Divest Tilt Engage

1. Understand how carbon risk could affect investments 2. Understand their carbon footprint and impact on future investment returns, risks and

• pportunities

3. Potentially take action to manage carbon risk 4. Challenge managers on how they factor in the risks/opportunities (dealing with

• bsolescence is not new)

If it can be measured, it can be managed

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Client case study

• External challenge from group of members/press coverage
• Trustees have:

– Listened to both sides of the argument – Agreed not to disinvestment – Developed a set of investment & responsible investment beliefs – Agreed to disclose details of fund holdings – Reviewing benefits of becoming a signatory to UNPRI – Reviewed manager disclosures and increasing reporting – Challenge all their managers as part of monitoring process – Looking to develop an engagement policy – Training on other forms of active and passive management

Next steps

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Range of options to consider

Core practice Active practice Leading Develop statement of investment beliefs Engagement with investment managers on ESG policies Regular reporting on manager voting and engagement activities Periodic training on responsible investment issues Understanding/report on potential ESG risk exposures e.g. carbon ESG factors considered in some investment decisions, e.g. manager selection Support for broader industry initiatives, e.g. UK stewardship code, UNPRI Ongoing training e.g. carbon tilt passive Polices in place for key matters ESG form part of managers’ review process ESG issues embedded in all investment decision making Active engagement with investee companies for value enhancement Collaboration with other investors to create change

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Focus on objectives and beliefs

Implementation e.g. policies, engagement, disinvestment, training, reporting Strategy Regulations and Beliefs Fund’s

• bjectives
• Develop implementation plan
• Feed into pooling agenda

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The material and charts included herewith are provided as background information for illustration purposes only. It is not a definitive analysis of the subjects covered, nor is it specific to circumstances of any person, scheme or organisation. It is not advice and should not be relied upon. It should not be released or otherwise disclosed to any third party without our prior consent. Hymans Robertson LLP accepts no liability for errors or omissions or reliance upon any statement or opinion.

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Thank you